E278: What Separates the Top 1% of GPs

0:00Joshua, I've been very excited to chat. Welcome to the How to Invest podcast. Thank you so much for having me. So tell me where Do Not Pay sits as a business today. So Do Not Pay has been around for a while. I like to think of Do Not Pay as a AI consumer champion. And what I mean by that is we've helped millions of people fight back against big companies in the government. The very first use case 10 years ago, I started it as a freshman in college, was helping people get out a parking ticket. And today we have over 100 areas of consumer issues that we help people with, such as getting people refunds, cancelling subscription, all of the areas where big companies know that people don't have the time to fight back.

0:37So do not pay as a subscription business. Consumers pay us on a monthly basis and then they get access to all of our services. And we have hundreds of thousands of customers. And it's a very small team of only 14 people at this point. We are venture backed. So it's a series B company. But given the scale of the business and the efficiency, we're actually profitable. So about a year and a half ago, we started doing dividends for our shareholders. And we were one of the first VC-backed companies to do that. And interestingly, one of my friends in Silicon Valley said, a company like Google would never pay a dividend.

1:09You shouldn't pay a dividend. And we paid our dividend. And actually, I think a few months later, Google paid their first ever dividend. So very exciting. And I still run it every day. And I also do a lot of exciting investing, which I'm excited to discuss with you. When we last chatted, you said that a company should exist to make money, which sounds extremely non-controversial. But in reality, you see venture capital plowing billions of dollars into companies before they get profitable. To your point, Google just recently started paying dividends. Why do you have this paradoxical belief? And isn't that in friction of growth and market share and all these other things that startups should ascertain?

1:46I arrived in the US and Stanford in 2015. And at that time, Snapchat was the big winner and the big inspiration for everyone. And of course, we all watch the social network. And so all of these social media companies kind of perpetuated this myth that it's okay for companies to continually lose money for a long period of time. And then you saw Uber and other companies like that do the same. And I think really it is a myth because Facebook at the Series A was profitable. And a lot of the best businesses actually do. And I'm seeing this now with companies that I was the kind of first believer in now doing quite well.

2:21They're actually great businesses. And so I think it's more of a myth than people realize about whether you should be losing too much money. And it's best to have a good business. What about network effects and economies of scale and all these things that you're supposed to gain as a venture backed startup, which is the reason you lose money as you're gaining these scale economies? I think that for network effects, particularly with social networks and marketplaces, it makes sense to go a little longer with kind of scaling for kind of enterprise software businesses, at least on a kind of gross profit basis, they should be profitable.

2:56You're also a solo GP investing out of your fourth fund at Browder Capital. Tell me about the story of how you became a venture capitalist. So I started my business by accident because I got a lot of parking tickets and I similarly became an investor by accident. So three and a half years into Stanford, I took a program called the Teal Fellowship, where they, I'm sure many of your listeners are familiar with the Teal Fellowship, but the summary is that they pay top 1 % young entrepreneurs between the ages of say 16 and 22. It used to be$100 ,000. Now it's$200 ,000 to take a two-year break from college and start a business.

3:31And I'd already started my company, Do Not Pay, but it was more of a project during college and I wanted to make it a serious business. And so three and a half years into college, I took the Teal Fellowship. And for me, it was transformational because I was really surprised. It was my dream to go to a place like Stanford from the UK. I grew up watching the Stanford YouTube videos on iOS app development. But I got there and actually a lot of my classmates wanted to go work at Google and Facebook. And now I have some family members there and they tell me now they want to be in like private equity and VCs.

4:03And so even a very entrepreneurial place like Stanford, there weren't that many people that I could turn to with issues that I was having with starting my business. And the kind of question I always have is, how do you convince a 35-year-old to work for you as a 19-year-old? And how do you do that? Well, it all comes down to aligning their goals with the company's goals. So they're not working for you, they're working for the company. Yeah, and everyone has different goals. And you have to change your recruiting pit to base on the candidate's goal. So if it's a 21-year-old fresh college graduate, it should be all about their personal growth and how the company will help them.

4:40If it's someone who's a bit older, it should be about stability and all of the kind of the company will be around in five years and all of that stuff. Anyway, going back to the Teal Fellowship. So I found these amazing 19 other people in my class of Teal Fellows who could give me advice on these very issues. And I thought this is truly amazing. I want to get more involved. And I was very lucky because at the time they were looking for people to help select the next year's class. Peter Thiel is an amazing entrepreneur investor, but he's very busy. And so they have this tradition with the Thiel Fellowship that every year the current fellows help select the new ones.

5:16And they're on the ground as entrepreneurs, so they can kind of tell what's real and what's not. So in 2019, I started interviewing future Thiel Fellows to help decide the next year's class. And so I did all these interviews. I probably interviewed close to 100 people that year. So it's like these 10 minute back to back interviews. And there was one person that I interviewed that instantly struck me, struck out to me as one of the top people I've ever met, both in the interview process and perhaps in my journey so far. And that was someone called Adam Gilt. And I was instantly convinced that he was going to do incredible things.

5:51And at the time, he had just incorporated his business a few weeks earlier. and I knew that he was going to do good things. And I thought I have to get involved in some way. And so he was living in LA at the time. I was based in San Francisco. And so I invited him and he slept on the floor of my office just because he needed a place to stay when he was coming to the city. And I took him to Unami Burger, which is a burger restaurant in downtown San Francisco. And I said, I really want to get involved with what you're doing. Is there any possibility that I can invest? And he said, yes, I'm doing my first ever round of fundraising in the kind of pre-pre-seed.

6:28If you're in, I'd love to have you. And the problem was I didn't have any money at the time to invest. My company wasn't paying dividends yet. It was before the scout fund mania that you see in the VC land today. But I did have one source of money, which is that when you win the Teal Fellowship, as I mentioned, they give you the 100K. And that just hit my bank account. And so I thought this is the most fitting use of the prize money to empty my bank account and invest it in him in the pre-pre-seed. So I put it all into him. And now the company is worth over a billion dollars. So I thought this is going so well, I should keep this going.

6:58And so I decided to raise funds. And I've kept that strategy of being the first believer to people who are more illegible to the market than me because I'm a founder and entrepreneur on the ground and be their first believer and go all out to help them. And then they become more obvious later on. What mistake did you make on your thesis on investing in Adam? And what did you guess correctly? I could never have imagined. I've only had a positive experience because it's gone well so far, you can never imagine just how big someone will become. And today it's publicly disclosed as a kind of unicorn company.

7:31But I think one day it could be the sky's the limit. And so my biggest mistake was he has exceeded even my own wildest expectations. And what's gone well so far is obviously the investment. Even that investment alone, I have this investment philosophy that life really comes down to one big decision a year. And that investment alone is enough to retire just personally. But obviously I keep doing this because I love it. And how can I make more decisions, big decisions like that? Because it was a kind of gutsy move at the time to empty out all my savings to put it into this guy. Tell me more about this.

8:08One decision a year is what's important. How do you distill that? How do you act on it? And what makes you feel that that's true? People spend too much time over-optimizing for the 5 % on the margins. Can I be like 5 % better here? And they spend so much time thinking about that. But really the best decisions are binary. Should I have invested in Bitcoin in 2015? Should I have done the owner investment? Should I do all this type of stuff? Should I start my fund? And those are the decisions that really count. And so I try and always take a step back and think about I should spend more time on binary decisions versus optimization style decisions when investing.

8:45And that's really what pushed me to start my fund. actually that that in and of itself is an interesting story there was an investor there was another company i invested in that did quite well with my own money as you may know when safes convert all of the investors in a company get kind of this disclosure about the round kind of converting and you can see who invested when and how much and there was an investor that was coming into the downstream round he saw my kind of thing on the schedule of purchases that i got into this other company quite early in any case. And he said to me, wow, you're going through this really early.

9:18If you're ever, I would love for you to kind of show me more of these, please. You know, I want to come invest with you. And I said, and I was doing a phone call with him and I just decided at that split second, I said, well, I'm starting a fund. If you're interested, I'd love to have you as my LP. There was no kind of just even thought of a fund before this phone call. I decided on the phone call and he said, well, I'm in. I'd love to invest 200K in your first fund. And that's how I got started with my fund. So that was another decision where it's just a split second moment that kind of changed my trajectory.

9:47So interesting. I hear what you're saying. At the same time, I wonder how almost these impulsive decisions, what kind of hit rate you have on that? And how do you marry making these kind of impulsive or in the moment decisions with good thought process and good rationale? I would say you kind of look for the upside in someone. And so my business model with my fund is really being the first believer to people that aren't credentialed. And you might think, well, that's Teal Fellows. And I do see a lot of Teal Fellows because I still interview them to this day. Prospective Teal Fellows sometimes make even better investments because they're earlier.

10:22But now the Teal Fellowship is the establishment. And oftentimes the entrepreneurs I get, I back, become Teal Fellows later and it becomes this kind of post-facto narrative. But really, I'm trying to back people that I believe will do amazing things and they have the skills to do that, but they really tick none of the boxes that even the young people funds look for. And I like to have the saying, it's better to create your own momentum than chase the hype of others. And so I think about when I'm deciding to invest in these people, how can I bend the world to make it a success versus is it going to be a success or not?

10:55And that can involve various different things to create momentum. Oftentimes they're not from San Francisco. So I say, move into my spare bedroom, move to SF. I joke with them that their valuation doubles the second they move to San Francisco, which is probably true. If they're not even a US citizen, I say, well, the O-1 visa for extraordinary people exists. Let me put your visa on my personal credit card as a gift. Let's get you the O-1 visa and just get them in the momentum thing. And I say to the entrepreneurs, it's your job to build the product. It's my job to help with everything else. And so for me, it's not really about a prediction decision.

11:25It's about, can I push them in the right direction? It's almost an operationalization of Dan Gross's pioneer. That's right. I would say the difference is there's a lot more depth. It's a one person accelerator. So I go all in on one person at a time and then they get momentum and then I get them the institutional seed. Someone comes in and takes moral responsibility for the company and I move on to the next one. It's like Y of one. And because of the one person, it's a lot more depth than any potential accelerator. I mean, YC now is like hundreds of people every year and that there's a lot of dilution on terms of the effort and there's only so much that they can do for you.

12:02But with me, I go all in and the people I introduce them to, I say, this is my one, you should really meet him. And I only have one spare bedroom as well. So yeah, force constraint. You're meeting these people so early just to give content. You're meeting them pre-accelerators. It's literally, I think probably some of the times they don't even have incorporated company. Are you looking just for IQ and grit? Are those the two variables? What other variables are there? iq i think is overrated so there's this myth now that these olympic math medalists in high school make amazing founders and there's so many resources from a lot of different funds if only we can have someone on every college campus to just get these olympic math medalists and there's this myth that there's like these special people who are just born special and they're just so special that you just have to catch them i think iq is important you definitely want above average they know how They need to know how to play the game and build their business.

12:53But what you said about grit is much more important. Being an entrepreneur, and I can speak about my own kind of experiences, like eating glass some days. It's like amazing other days, but some days, of course, there is always a temptation to give up. And unless they truly have a connection to the problem and have some sort of chip on their shoulder that they can't give up, then they're going to give up and it will be a bad investment. And so one of the things that struck me about Adam Guild was he originally started Owner.com for his mother. His mother had a dog walking business that was destroyed in the pandemic.

13:27And he started it because she needed to get online. People wouldn't just show up for the physical dog walking business anymore. And he was the difference in making it between a failure and a success so his mother could afford her livelihood. and that is the type of kind of chip on the shoulder mission that I look for. This is not related to Adam, but maybe other ones, they maybe have something they really want to prove in their childhood or something like that where they won't give up. And actually, if I index all of the people that I've met over the past 10 years, including people that I've interviewed, thousands of prospective Teal fellows, literally over a thousand now over six years, and friends from the Bay Area, friends from Stanford, I can't tell you a single person that if they were earnest and they never gave up, they didn't achieve some level of success.

14:13Now, of course it varies, but... And you're saying not only on that company, but within a decade post. Or are you saying specifically on that company? Let's be honest. Subscriptions out of fast. Streaming services, apps, memberships you forgot you even signed up for. And canceling them is usually a pain. That's where Experian subscription cancellation comes in. Experian can take the pain out of canceling subscriptions by handling it for you. You just keep the ones you want and put money back in your pocket. Over 200 subscriptions are cancelable. You can also save money by letting Experian negotiate the rates on your bills.

14:50They'll keep an eye out for new deals and saving opportunities and negotiate directly with your provider on your behalf. And the best part, you keep 100 % of your savings. Get started with Experian app today. Results will vary. Not all bills or subscriptions are eligible. Savings not guaranteed. paid memberships with a connected payment account required see experian.com for details no i think the next company or something they achieve some level of success and typically with a company it's a surprisingly high hit rate if it truly is their life's work so the number one thing i look for is is it their life's work and do they have a chip on their shoulder to never give up and then beyond that a lot of people ask me how do i pick and i have this quote from the supreme court you know it when you see it and i think it was related to pornography and so you can't exactly quantify what it is, but there's some general heuristics, which is that I look for a top 1 % skill that they've exhibited during their kind of teenage years that make them demonstrate like extraordinary ability to execute.

15:53And different generations of entrepreneurs have different ways to prove this. So I started coding around age 12. So this was in the kind of early 2000s and 2010 style era and back then the most exciting thing in 2010 to 2013 was jailbreaking so like selling themes for jailbroken iphones and software on the city app store which is the unofficial app store and things like that then the next generation maybe like adam guild's generation and there's an entrepreneur called john andrew who was his first investor with wonder they really focused on minecraft service and you would see with actually with both of them they were making in some instances, six figures every month, renting out Minecraft service.

16:34Then the next generation, like WAP, WHIP, which is now publicly disclosed to be close to a billion dollar company, I think is 800 million. They were doing sneaker bots. So bots to snag sneakers before everyone else. Now you're in the Roblox generation. And actually, maybe the joke is we've skipped all of this intermediate stuff. Maybe there are 13 year olds on X now who actually have serious MRR for SaaS products. So maybe now they don't even do anything in between. They just go straight to the SaaS. And there is not that they have an idea. It's that they're able to take an idea from beginning to execution to money in the bank.

17:09That entire life cycle shows that grit, shows that innovation, shows a lot of the traits that will make them successful as an entrepreneur. And I look for them being exceptional in something. So that can be engineering. I was lucky to back to the first engineer, sorry, the youngest engineer at Amazon when he was 16. and obviously he's a top 1 % engineer for his age, in my opinion. But it can also be distribution like the Watt founders or Adam Guild who have more experience breaking through the noise in a very crowded world. And that can sometimes be even more important. Yeah. Peter Thiel now calls himself a distribution maximalist.

17:41Yes. Last time we chatted, you said that startups are momentum machines. What did you mean by that? So at the pre-precede, when the company is on life support and it incorporated a week ago, So there's only three reasons why I think they fail. And it's very simple. They run out of money, they run out of hope, or co-founder disputes. Co-founder disputes can be managed. YC has done a very good job about educating the ecosystem on investing and things like that. So I'm less worried about that. And you can kind of tell if they hate each other, at least initially. Running out of money is also not really an issue at my stage of investing because I give them kind of enough speed that they typically almost always raise some downstream funds.

18:20is the running out of hope that's the biggest thing. And so the number one thing that I do for the entrepreneurs I back is every week, I want them to feel like they're making serious progress. And it builds over time. And it's like an escalator of momentum and credibility. The first step on the escalator can even be they decide what the name of the company, if they get a top tier name and domain name, that's a great first step. Then they build their product, getting kind of a test version of their product out and then getting their first customers. And then it becomes a snowball where they make their first hires, they raise more money, they raise more money.

18:53And one day they become a unicorn and they have 300 people working there. And the snowball is just going so fast down the mountain that it can't be stopped. And so I really think it's all about momentum. And when I'm evaluating, I'm like, can I give them enough momentum to make it a big outcome? How does the role of the founder change pre and post momentum? Is it a fundamentally different role? Yes. And I saw this with my own journey with Do Not Pay. Pre momentum, you want a kind of product expert. someone who's solving a real problem and amazing with the product. And that's a very important skill to have even throughout the life cycle of the company.

19:27Like Dylan Field is still in the weeds with Figma and he's making an amazing product today. But after kind of you have the product, it becomes much more about building an organization. Can you hire a lot of people? Can you raise a lot of money? Do you know the exact things to say to investors? And people kind of have to scale themselves to building an organization. Do you believe that the founder should always be at the helm of CEO and these founder-driven startups as they scale? Or do you think there's a room for Sheryl Sandberg in certain situations, the COO? And how does one know? I think if the founder's heart is in it, they are always the best person running the company, at least nominally as CEO.

20:05The question is, if their heart is not in it, then of course, if the jockey, there's an expression, if the jockey is not interested in riding the horse, then the horse should get a new jockey. So it's up to the founder. I think that if the founder truly, they believe it's their life's work, they should always be running their company. So it's up to them. But of course, if they don't want to do that, then someone else can come in. I think when someone else comes in, it's kind of a salvage situation, you're kind of picking up scraps. And so it's best to focus on the ones where there is this true alignment.

20:34So whatever, whatever the founder wants, really. That's kind of the linear Tim Cook to Steve Jobs, where Steve Jobs created this compounding machine and Tim Cook is the professional manager that could only do so much. There's no asymmetry left in the company. Yeah, but there are counter examples like Uber, I think, has done very well. Although that's controversial, I guess, in my circles. Microsoft as well. Yes. There's a lot of people who kind of read a lot of books and like study the public markets and apply those to their day-to-day operations. For me, it's just about, you know, moving them out of my spare bedroom and getting them a seed round so that they can be a success.

21:09And I'm really a tactical thinker on a day-to-day level. You brought up this concept of founders doing their life's work. Distill that into a couple examples. Give me a sense for what that even means. There's an entrepreneur I backed who their family is from California and they were impacted by the fires and insurance and things like that. And they started an incredible insurance company to automate insurance. based on their personal experience. Something like that. So it can be from their family. It can be from their life experience. For me, I'm the type of person to wait on hold for four hours to save$20.

21:42So I'm Mr. Do Not Pay. And I look for that level of connection with the people I back. And there's two things. So it's connection to the problem. And that's important. And then connection to wanting to build a big outcome. And that can be for a variety of reasons. Maybe they hate their sibling and they just want to like do more than their sibling. or there's all sorts of reasons people want to build something big. And I don't mind what the reason is. I hate saying maybe their parents weren't that nice to them. Who knows? But they have to have like this delusional sense of never wanting to give up plus a deep connection to the problem.

22:15I need this ego attachment to winning. How do you suss that out in interviews and when you're diligencing a startup? How do you figure out that psycho analytical aspect of a founder? so i think the reason people like me to do interviews is because i'm very cynical and i can catch all of the things that other people don't catch and so when i interview i had not just your fellowship i interview for other programs as well and help out my friends with their different programs and events and um someone might have all the credentials so they went to a top school and they even have a top vc firm that back them and they have all of the they worked at okay they went to a top school they worked for a top company they have a top vc firm that back them and i go through everything and i think that they're not real um and it's the little things that you kind of pick up on and so it could be to do with work ethics so when i meet an entrepreneur i say let's meet let's meet at 10 p.m tonight like at 10 p.m this saturday and they'll say well how about on Tuesday and it takes like a week to even schedule and so and then you meet them and it's like I go through the product and if they're post-launch sometimes these entrepreneurs they do actually have a few thousand in monthly revenue I say show me your metrics and they say I don't have that on my phone what type of serious entrepreneur doesn't have the stripe app on their phone so the best ones they just know it that they like go through everything like know every detail and it's really about their attention to detail and their work ethic and you can kind of build up signals with kind of what they're doing.

23:48Said another way, it wouldn't disqualify them from being a middle management employee at a Fortune 500 companies, but it's disqualifying when you're trying to be a founder. You need that edge. Yeah. And I back first time founders. And so sometimes they can be 28 or they can be 18. It's not like this age. That's another thing everyone gets wrong about young founders. They think it's about the age. Really, it's about the grit of being a first time founder. And the reason is if you back an 18 year old high school dropout, the first thing they'll do is they'll build the product and they'll get customers.

24:16If you back a 10-year-old middle manager that they've been a middle manager at Google for 10 years, the first thing they'll do is they'll hire 10 people. And those 10 people will probably hire five people each as well. And it'll be an endless scheme of hiring. And so it's really about the first time kind of grit and hustle with low lifestyle burn. You invest, I think you called it pre-pre-seed. I don't know if that's a technical term that you use, but pre-pre-seed. How do you think about portfolio construction? How does that differ from, say, a seed fund or a Series A fund or other types of funds?